Wall Street Moves and Position Adjustment will Dominate on Friday, Risk Appetite Still Vulnerable
Global risk conditions have continued to have an important impact on major exchange rates and this will continue in the short term.
There will be an underlying shakeout of positions built up during the period of extremely low global interest rates which will maintain vulnerability in risk conditions.
There will, however, also be scope for a short-term correction after heavy losses which can provide an element of relief for risk assets, especially if markets dial back on the most aggressive projections surrounding Fed policy.
Inevitably, volatility will remain elevated in the short term with risk recoveries liable to fade quickly.
Pound US Dollar Exchange Rate Outlook
Confidence in the UK economy has continued to deteriorate with increased talk of recession following the latest batch of data releases.
It is certainly possible that the UK economy will contract in at least two quarters this year.
Although Bank of England Deputy Governor Ramsden stated that interest rates have not peaked, there was further speculation that the BoE would have to limit rate hikes due to pressure on the economy.
Risk conditions will also remain very important for the GBP/USD outlook with further losses if equity markets continue to slide.
There will, however, be pressure for at least a limited correction after heavy losses and GBP/USD will bounce if equity markets manage to recover.
Overall, there is scope for GBP/USD rebound, although rallies will attract selling interest quickly with markets still targeting a slide to 1.20.
Euro (EUR) Exchange Rates Today
Although there has been a shift in expectations towards ECB policy and increased expectations of a rate increase in July, the Euro came under renewed pressure on Thursday.
The Euro to Dollar (EUR/USD) exchange rate dipped back below the 1.0500 level which helped trigger aggressive selling and EUR/USD dipped sharply to 5-year lows below 1.0400. It was also trading close to 19-year lows as confidence in the Euro-zone outlook remained weak.
There will be pressure a limited correction, but EUR/USD will be dependent on a wider dollar retreat to secure a significant recovery in the short term.
Speculators will still parity as a key short-term market target.
US Dollar (USD) Exchange Rates Outlook
The dollar posted further strong gains on Thursday as European currencies remained under pressure and the dollar index posted a fresh 20-year high as the Euro crumbled.
There was a slight retreat on Friday as a tentative recovery in risk appetite curbed defensive demand for the US currency.
Fed Chair Powell reiterated that the bank is planning 50 basis-point rate increases at the next two meetings which would take rates to 2.00%.
Yields and risk trends will remain very important for the dollar in the short term.
Wells Fargo maintains a bullish dollar stance; “A hawkish Federal Reserve has boosted the US dollar against most G10 and emerging market currencies year to date, and we believe this trend is likely to continue. Given our view that the Fed is likely to tighten policy aggressively, we believe capital flows should revert back toward the US.”
It also considers expectations surrounding rate hikes elsewhere are too high; “As far as the G10 currencies, we believe financial markets may be priced for too much tightening by many foreign central banks. As markets adjust to a more gradual pace of tightening abroad, G10 currencies should weaken and the U.S. dollar should get a tailwind.”
The Japanese yen gained fresh support on Thursday as equity markets came under renewed pressure.
The Pound to Yen (GBP/JPY) exchange rate lumped to 8-week lows below 156.0 before a recovery to around 157.50 as equites attempted to rally.
The Swiss franc was unable to gain more than limited support and the Dollar to Swiss franc (USD/CHF exchange rate broke above the parity level for the first time since late 2019.
The Canadian dollar was resilient as oil prices moved higher again and the Pound to Canadian dollar (GBP/CAD) exchange rate was held below the 1.6000 level.
The Day Ahead
The latest US consumer confidence data will be released on Friday, although the overall impact is likely to be limited unless there is a substantial decline.
Wall Street trends and wider developments surrounding risk appetite are likely to dominate during the day.
Although there will be scope for a further correction after sharp losses, underlying confidence is liable to remain vulnerable which will contribute to further volatility during the day.